All bets are off in the race for financial services AUM in about five weeks, when hedge funds and private equity companies formally gain the right to market directly to potential clients. That’s when the provisions of the JOBS Act that lift the ban on hedge fund and private equity advertising become effective. These rules were formally approved about a month ago by the federal Securities and Exchange Commission.

There’s been a lot of speculation about exactly what hedge funds and private equity companies will do when they can advertise and market, which could be anything and everything including:

Celebrity endorsements

Billboards

National advertising campaigns

Direct mail and email solicitation

Fancy dinners, conferences and seminars

It’s all likely, but what hasn’t been discussed as much is the impact of the entrance of extremely well funded entities who are set up to compete with financial advisors, financial services companies and asset managers for a limited pool of high net worth, ultra high net worth and institutional assets. There’s a limited pool of these assets, and competition is already fierce among companies that have the right to directly market and advertise today.

Imagine what it’s going to be like in a few years when extremely well funded hedge funds really get their arms around what they can do and hire the brightest and the best Mad Men to formulate and execute a marketing strategy for them. While all healthy financial services firms have money to burn to a degree, hedge funds charge fees far in excess of what other asset managers can charge and they also have the ability to lock up AUM so that it can’t flow out in the same way that it does with mutual funds and financial advisors.

If you are currently seeking to gather AUM, you better watch out. These guys are coming and they have the ability to suck all the air out of the room so that there is even less space for other messages. In an already noisy atmosphere, it will be even harder for potential clients to distinguish your message from all the others out there.

That means if you don’t have a clearly defined ideal client type and a plan to attract those clients to you, you better get moving. Time’s a wasting…..

Charles Schwab has given up – at least for the moment – on forcing its customers to waive their right to a class action lawsuit in case of a dispute. While it’s hand was forced by the Financial Industry Regulatory Authority (FINRA), Schwab could have retained the class action ban in its securities agreements until its dispute with FINRA is fully resolved.

As reported by The Wall Street Journal, FINRA brought a compliant against Schwab early last year, alleging that the the class action ban was against FINRA rules. FINRA rules prohibit the use of class action waivers by brokerages and investment banking firms and requires firms to only require arbitration of individual claims.

In February, part of the FINRA complaint against Schwab was dismissed as the FINRA panel hearing the dispute said that it couldn’t stop Schwab from forcing its customers to waive those rights. FINRA has appealed that decision.

Then came the Schwab decision to modify its customer agreements to remove the class-action ban beginning May 15 and “in the foreseeable future.” Of course, if they ultimately win they are likely to reinstate the class action ban — a company spokesperson said, “We have chosen to voluntarily remove the waiver going forward until the issue is resolved by the appropriate regulatory and/or court decision.”

Regardless of the outcome of this dispute, it’s clear that the binding arbitration system in securities dispute needs to be throughly examined and eventually discarded by the federal Securities and Exchange Commission (SEC).

FINRA is the administrator and a major stakeholder in the current binding arbitration system, which requires customers of brokerage and investment banking firms to arbitrate disputes rather than take them to court. I’ve written about binding arbitration, which is biased against consumers, unfair and serves to abrogate the right of investors to access the U.S. justice system in a post entitled SEC should end mandatory arbitration clauses in brokerage contracts.

According to the consumer rights group Public Citizen, more than 7 million Schwab customers have been affected by the class action ban. In a letter urging new SEC Chairwoman Mary Jo White to take up the subject of either banning or modifying the use of arbitration in brokerage contracts, Public Citizen and 14 other organizations, including AARP, Consumer’s Union and the Consumer Federation of America, notes that “The 2008 financial crisis, the effects of which the country continues to wrestle with five years later, should be enough to motivate the Commission to restore investors’ legal rights.

“Brokerage firms were responsible for many fraudulent actions that led to or arose from the financial crisis. Indeed, the Commission identified Schwab as one of the firms that misled investors and ‘concealed the extent of risky mortgage-related and other investments in mutual funds and other financial products.’ Ensuring that investors can choose the forum in which to resolve disputes with broker-dealers and investment advisors is critical to both to remedying those past abuses and deterring future misconduct.”

If advisors aren’t being chastised for being too old, they are being dissed for being too young. It’s confusing, but apparently all that is needed to solve the problem is image consulting, according to this Wall Street Journal article.

While I agree that advisors need to present themselves in a manner that is in tune with their client base, odds are that an advisor who is knowledgable, empathetic and truly understands the needs and concerns of that client base will connect with that client base. Lacking those characteristics, no amount of “dressing up” will make up for serious shortcomings.

Most people know when their trusted advisors are genuinely authentic in terms of their interest in them as people — not just as a source of revenue — and know their stuff. If that isn’t the case, those gaps in knowledge or phoniness will be apparent in time, in many cases sooner, rather than later.

The best way to present yourself in an authentic manner is to have deep knowledge of your niche, be confident in your skills and stick to processes that will help your clients be as comfortable as possible. An attitude of respect for clients and your team members, an ongoing openness and search for new knowledge and skills and some humility go far in helping you connect in an ongoing way with clients and potential clients.

After all, they are trusting you with their life savings, placing faith in you that you can help them reach their financial goals. The best financial advisors that I have the privilege to know all exude these characteristics.

Forget about the image consulting — for those advisors who aren’t fiduciaries in the truest sense of the word (if not in fact by industry and regulatory standards) — no amount of lipstick will dress up that pig.

When an investor affiliates with a new financial advisor, a take it or leave it mandatory arbitration clause is part of the contract. This means that investors must submit any disputes to arbitration run by the financial services industry self-regulating agency, FINRA.

In arbitration, investors and financial advisors and broker-dealers must submit to their dispute to a panel of arbitrators, a potentially expensive process that circumvents the traditional judicial system. Mandatory binding arbitration has been a sacred cow of the investor-financial advisor relationship for decades.

Until, perhaps, now. The Wall Street Journal reported that federal Securities and Exchange (SEC) Commission Luis Aguilar has called for an end to binding arbitration clauses. Aguilar cites the 2010 Dodd-Frank Act, which authorizes the SEC prohibit or restrict these types of agreements for broker-dealers and investment advisors.

I started writing about binding arbitration clauses in business to consumer contracts nearly 10 years ago and believe it’s an inherently unfair practice for consumers and investors. I don’t object to arbitration per se, when arbitration contracts are freely entered into by parties with equal power in a relationship, such as in business to business contracts.

But when they are forced on consumers and investors en mass and the consumers and investors have few if any choice but to accept mandatory binding arbitration clauses in a contract, they just aren’t fair. This country was founded with a judicial process meant to provide the maximum amount of fairness to all parties involved. It’s not perfect, but consumers and advisors deserve to have the ability to avail themselves of it to solve disputes.

Instead, investors and advisors are forced into what is essentially a private judicial process with it’s own opaque rules and procedures, where conflicts of interest on the part of arbitrators are difficult, if not impossible to determine and decisions aren’t fully explained and are incredibly difficult to appeal, regardless of the justice of the ultimate verdict.

So I’m with Commission Aguilar: end binding arbitration in investment advisor and broker-dealer to consumer contracts. Now.

Advizent, the once-promising RIA marketing and branding consortium, was shut down last week by founders Steve Lockshin and Charles Goldman, Financial Planning magazine reports. They cited a lack of support from potential members and an unwillingness to take on outside capital as the reasons behind the decision to terminate the venture.

Sources quoted in this article and several others, including in RIABiz and Investment News, cite a number other reasons for the failure, including:

Unwillingness of RIAs to cooperate with each other

The high level of fees sought by the Consortium

Inability to provide a compelling ROI

Competition from other marketing and branding efforts

Lack of foresight in regarding to branding by RIAs

Advizent sought to create a marketplace that would match consumers with RIA firms, who would be rigorously pre-screened for ethics, compliance, succession planning, strategic planning and other characteristics. Consumers, attracted to the site via national marketing and advertising campaigns, would have been presented with Information about member firms and would have been matched with firms meeting their specific criteria.

I agree with some of the assessment in the articles exploring the reasons for the firm’s demise: for advisors to pony up the type of money that Advizent was seeking in return for a potential fuzzy pay off of consumers being directed to their firms via a website just wasn’t compelling enough. Then, there’s the fact that many advisory firms are far from sold on decent, let along large, budgets for marketing.

Add to the fact that RIAs are independent by nature and may have been wary of what they saw as a cookie cutter solution that didn’t stress individual differentiators enough, and the venture just didn’t have enough support in the industry to get off the ground.

I also believe that the venture ultimately didn’t succeed because this isn’t the best way for RIA firms to differentiate their brands, and RIAs sensed this. As I’ve written previously, in this day and age of fragmentation of the traditional media, advisory firms can best differentiate themselves via thought leadership targeted to a specific ideal client type. Savvy advisors are putting their marketing dollars into these kinds of content marketing campaigns and realize that they can best attract clients that will already meet their criteria — cutting the length and expense of the client acquisition cycle — by stressing their differentiators.

A pitch to the masses (even masses of high net worth investors) via a branded website isn’t what these firms need, and it wasn’t likely to generate enough business for member firms to justify the fees even if it did scale up and garner a decent following among consumers. Selling financial advice is becoming less and less like selling a car or a widget and Advizent’s nascent offering may have seemed too much like mass selling with too little potential for differentiation for member firms.

The evolution of the financial advisory industry is still in a very early phase. It’s too much like the Wild West for this type of consortium to succeed. The day may come when advisors — and consumers — will be more receptive to this type of branding model, but it’s a ways off.

For decades, the backbone of the financial advisory industry has been small Main Street type practices, where a solo advisor assisted by an employee or two picked investments and handled financial planning for his neighbors and businesses in the community. Many of those advisors were brokers employed by a major wirehouse firm, and there was a lot of pride and strength in that association.

But as Financial Planning Magazine reports this morning, an almost paradoxical trend of getting smaller to get bigger is playing out and will accelerate in the industry during the next five years. This involves more break-away brokers, those who previously were at large wirehouses, going independent and forming their own firms. The most successful of those firms are successfully scaling and growing larger and are poised to continue to do so, gobbling up some smaller players in the process.

These larger firms have the capacity to not only offer the products and services that wealth, savvy clients expect, but also to handle the increased regulatory demands being placed on advisors. The smallest practices, those with $40 or $50 million in assets under management, will be under more pressure as fee pressures, regulatory demands and the appetite for wealth management rises.

Here’s what I see as the implications of these trends:

The smallest firms will need to either scale up and add staff and capacity, be in a better position to be acquired by a large firm needing their expertise or location or risk eventually going out of business — the “Darwinism” the article refers to.

Break-away brokers will have more choices than ever before among service providers who can truly understand their business model and offer the services to help them launch and scale rapidly. Players in this space include High Tower, Dynasty and Securities America, notes the article.

Middle-sized RIAs who aren’t scaling need to embrace this trend or risk getting left in the dust and shrinking rather than growing.

Wirehouses continue to suffer a brain drain that could damage their capacity to attract discerning high net worth clients, as it is getting more and more attractive for the best talent to leave at a time when wirehouse brands inspire less and less trust and struggle with profit margins and staffing.

When the SEC issues it’s yearly National Examination Guidelines detailing what its examiners will look for in audits of the more than 11,000 federally registered investment advisors and 800 investment companies, prudent advisors pay attention. While it’s unlikely that you’ll get examined if you fall into this category given the SEC’s limited resources, the guidelines are very informative in terms fo what issues regulators are paying attention to in any given year and how perceptions of risk are evolving in the financial advisory space.

As reported by Financial Planning magazine this morning, risk around conflict of interest is an ongoing priority for the Commission because conflicts of interest tend to arise constantly and change in nature. Examiners will be looking for specific conflicts of interest, what advisors are doing to mitigate and disclose those those conflicts, which can be particularly challenging for larger advisory firms. During examinations, staff will be analyzing financial and other records to identify compensation arrangements that aren’t being disclosed to clients, which may include:

Undisclosed fee or solicitation arrangements

Referral arrangements with affiliated entities

Receipt of payment for services allegedly provided to third parties

In terms of marketing, the SEC is looking at how advisors market, specifically around performance numbers. The SEC wants to ensure that all advertising of performance numbers is accurate, including that of hypothetical and back-tested performance and will look at assumptions and methodology, disclosures and compliance with record-keeping requirements.

The SEC’s other priorities in examinations include fraud detection and prevention, technology and corporate governance and enterprise risk management.

The take away for alert advisors? Analyze your practices and processes in these areas to make sure you meet or exceed the SEC’s standards. Talk to your team about potential conflicts of interest and make sure anything that even remotely might look like a conflict is disclosed to clients, whether it would draw a second look in an examination or not.

Whether you are likely to be audited or not, adopting best practices and evolving your practice to meet the highest standards possible is the best route to gain trust with your clients, potential clients, referral sources, employees and other stakeholders.